University of Texas Borrows $516 Million as IRS Audits Salaries
June 23, 2010, 12:20 PM EDT
By Brendan A. McGrail and Allison Bennett

June 23 (Bloomberg) -- The University of Texas System, which has the fifth-highest endowment among U.S. colleges, sold $516.2 million in Build America Bonds as its flagship campus is audited by the Internal Revenue Service.

The IRS is examining the University of Texas at Austin for executive compensation and matters related to taxable income, preliminary offering documents show. Mack Brown, head football coach, the highest-paid state employee at $5.1 million per year, earns almost seven times more than Francisco Cigarroa, who’s paid $750,000 as chancellor of the University of Texas System. By contrast, Texas Governor Rick Perry receives $150,000 a year.

Texas’s Build Americas maturing in 2030 were priced to yield 5.09 percent, or 100 basis points over 30-year U.S. Treasuries, with securities due in 2042 priced to yield 5.13 percent, or 104 basis points over the federal debt, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

“UT is one of the few natural AAAs out there,” said Regina Shafer, who helps manage $5.2 billion in municipal assets as assistant vice president of fixed income at USAA Investment Management Co. in San Antonio. “With all the headlines this is one the few you can buy and still sleep at night.”

The university system is rated higher than the state, which was awarded AA+ by Standard & Poor’s and Aaa from Moody’s Investors Service.

The system’s only other Build America sale was a $330.6 million issue in June 2009. Securities due in 2041 were priced to yield 6.28 percent, 152 basis points above 30-year Treasuries, according to Bloomberg data.

Average Yield

The debt traded at an average yield of 5.4 percent on June 21, according to Municipal Securities Rulemaking Board data. That’s 123 basis points above government debt, and 61 basis points above top-rated Microsoft Corp. bonds maturing in 2039, which traded at 4.77 percent the same day.

The university system “doesn’t trade on the AAA level, generally comes 15 to 20 basis points behind the AAA,” said Dexter Torres, a trader with New York-based Samson Capital Advisors LLC. “The market requires a little bit of spread even though it’s AAA.”

Michigan State University and the California State University each sold $205 million in Build America debt this year. California’s March sale, rated Aa3 by Moody’s the fourth- highest level, had bonds to be redeemed in 2041 priced to yield 6.48 percent, 191 basis points above Treasuries. The second- biggest tranche, maturing in 2030, priced at 6.43 percent, or 186 basis points above the benchmark Treasury. It traded on June 16 at an average yield of 6.23 percent, or 205 basis points over Treasuries.

The IRS mailed questionnaires to 400 nonprofit colleges and universities in October 2008, seeking data on endowments, compensation and income from businesses unrelated to their missions of teaching and research. It picked more than 30 institutions to audit on the basis of answers and is reviewing an additional 13 that failed to respond, the agency said.

The city of Austin, Texas, the site of the university’s flagship campus, had $617,284 in Build America subsidy withheld by the IRS in February amid a dispute over payroll taxes. The city still owes $35,000 that may be withheld from a subsidy for a Sept. 1 payment.

“I think the whole IRS issue and the reimbursement issue have cooled people off on BABS,” said Matt Dalton, chief executive officer of Belle Haven Investments Inc. in White Plains, New York. “I think you might expect that.”

Build Americas

Build America Bonds, created last year as part of the economic stimulus program, are the fastest-growing part of the $2.8 trillion municipal market. Issuers are eligible for a 35 percent subsidy on interest rate costs from the U.S. Treasury. About $114 billion of the securities have been sold, Bloomberg data show.

The university’s offering comes as the future of the program, which is set to expire in December, is still undetermined. A two-year extension is included in a jobs bill currently being debated in the U.S. Senate. Passed by the House of Representatives May 28, the provision would cut federal subsidies to borrowers to 32 percent in 2011 and 30 percent in 2012.

--With assistance from Justin Doom in New York, Michael McDonald in Boston and Darrell Preston in Dallas. Editors: Walid el- Gabry, Pete Young

"That's the reason my FFL team name is TrentGreenLeadBlock. When you see this mother****er coming around the corner on a block, put your children to bed and batten down the hatch on your girl's snatch, because the same power that destroys defenders can scar the minds of the youth and simultaneously impregnate any woman within sight, live or on television."

Yeah, it illustrates rather well the size of the balls that the University of Texas is swinging.

__________________
ZootedGranny:

"That's the reason my FFL team name is TrentGreenLeadBlock. When you see this mother****er coming around the corner on a block, put your children to bed and batten down the hatch on your girl's snatch, because the same power that destroys defenders can scar the minds of the youth and simultaneously impregnate any woman within sight, live or on television."